Australians have been warned to brace for a tough year ahead, with a range of economic forecasts painting a picture of uncertainty, instability and a “bumpy” road ahead.
Economist Greg Jericho described what lies ahead as “bleak” and warned Australia would face a year-long “shock”, based on the latest forecasts from the International Monetary Fund.
The economic growth forecast here was revised down from 1.7 percent to a “historically bad” 1.2 percent, as Jericho noted in the analysis published by Newsweek magazine. Watchman.
“From the end of the 1990s recession to the year before the pandemic, average annual GDP growth was 2.9 percent,” Jericho wrote.
“The International Monetary Fund does not expect us to achieve annual growth of more than 2.3 percent until 2028.”
There will be many direct impacts from a slowing economy, from rising unemployment to what the Reserve Bank does next with regards to interest rates.
High rates are here to stay
“High interest rates are here to stay,” warns investment management firm Vanguard’s full economic and market outlook, released in mid-December.
The report stated: “Even after interest rates decline from their cyclical peaks, interest rates in the next decade will stabilize at a higher level than we have become accustomed to since the 2008 global financial crisis.”
The economic impacts of this scenario, both here and abroad, “will be profound.”
“Borrowing and saving behavior will be reset, capital will be allocated more wisely, and asset class return expectations will be recalibrated.”
While a higher interest rate environment will ultimately be a positive thing in the long term, “the transition could be bumpy.”
One such outcome is deteriorating working conditions, including lower demand, higher unemployment rates, and reduced working hours.
Vanguard expects Australia’s unemployment rate to rise from its current low of 3.8 per cent to 4.75 per cent this year.
But the Reserve Bank of Australia has indicated that rising unemployment will help bring down the red-hot inflation rate – the main driver of its rapid march of interest rate hikes.
The Reserve Bank of Australia expects inflation to fall by 3.5 per cent by the end of the year.
But this path is slower than expected, which means interest rates will have to remain high for longer.
While many economists expect the RBA to begin cutting its policy rate at the end of 2024, Vanguard’s view is more pessimistic.
It does not expect any change to the current rate of 4.35 percent this year.
But Commonwealth Bank chief economist Stephen Halmarek believes the RBA will go its “narrow way” to crushing inflation.
Halmarik expects the cash rate to fall by 75 basis points in the second half of the year, starting in September, with a further 75 basis points cut in 2025.
The resilient economy is set to slow
The Australian economy has remained surprisingly resilient in the face of a worsening cost of living crisis, rising interest rates, and persistently high inflation.
An IMF review of conditions noted that “unemployment and output remain low [is] Above potential, housing prices rebounded after a correction in 2022.”
“After a strong post-pandemic recovery, the Australian economy is slowing but remains resilient,” its report said.
“GDP growth slowed to 2.1 percent [year-on-year] in [the third quarter of 2023]From 3.7 percent in 2022, with consumer demand slowing in real terms, due to a decline in real household disposable income due to higher inflation and higher mortgage interest rates.
“Net exports also contributed to growth on the back of strong sales of iron ore and coal, and a strong recovery in tourism and education.
Output is estimated at about 1 percent above potential, with unemployment remaining at a low rate.
Vanguard’s forecast for economic growth ranges from 0.75 percent to 1.25 percent, on par with many other metrics, and well below the trend.
This view is shared by the Reserve Bank, which revealed in its November monetary policy statement that it expects the economy to remain “below trend… with cost of living pressures and rising interest rates continuing to weigh on demand”.
The latest economic forecasts from consultancy KPMG credit “extraordinary levels of population growth through out-migration” with avoiding the worst economic conditions last year.
It is estimated that Australia’s population increased by about 630,000 people over the year to 30 June 2023 – an increase of 2.4 per cent.
“This population growth has boosted consumption and investment and provided the government with large amounts of unplanned tax revenues, allowing wealth to be reflected in budgetary outcomes.”
How long this will last is unclear.
The Commonwealth Bank is relatively optimistic about what lies ahead, although it acknowledges a series of challenges facing the economy.
“Looking ahead, 2024 will have more than its fair share of risks and challenges, especially geopolitical risks as well as the presidential elections in the United States,” Halmarek said.
“Despite these obstacles, the Australian economy remains in relatively good shape.”
Consulting firm Deloitte Access Economics described the country’s economy as being on a “knife’s edge” in its latest forecast note.
There is significant pain being felt across the economy, said David Rumpins, a partner at the firm and author of its latest report.
“The retail sector knows it – a retail growth trend of just 1.3 per cent is the lowest growth trend recorded since 1982, just before Australia won the America’s Cup,” Rumpins said.
“Consumer confidence remains very fragile, near all-time lows. Business failures are also on the rise through 2023, centered on construction but also affecting accommodation and food services, manufacturing and retail.
“However, Australia’s shaky economy must not only deal with today’s cost of living crisis, but also help Australian business look to 2024 as a year of growth.
“The business cycle will soon cross its lows and begin to rise again. Real wages will begin to rise…strong population growth will provide essential support.”
“Alongside the short-term economic cycle, there are also significant opportunities for Australian businesses, through the adoption of AI, and from the necessary transition to net zero emissions by 2050.”
Australia will feel global economic headwinds in the short term, with Vanguard warning that the mostly bank-reliant European economy is “already approaching recession” and China’s Covid recovery has been “weaker than expected”.
He also expects the US economy to face a “moderate contraction” – but it is necessary to control inflation there.
However, America’s chances of avoiding a recession and instead experiencing a “soft landing” remain possible.
Treasurer Jim Chalmers warned late last year that “high interest rates, persistent inflation and a slowdown in China, especially the struggling real estate sector, are all weighing on the global outlook.”
Future outlook for housing
Like other major banks, the Commonwealth Bank expects continued increases in house prices through 2024, albeit at a more modest rate than seen recently.
It expects values to rise by five per cent nationally, much less than the 9.6 per cent increase last year.
“A slowdown in net migration – combined with consistent and coordinated measures to increase the supply of new housing – will be crucial to restoring some balance to the Australian housing market,” Halmarek said.
Meanwhile, challenger bank NAB expects house prices across capital cities to increase by 5.4 per cent this year, with Brisbane leading the way with 6.5 per cent growth, followed by Adelaide (6.2 per cent) and Perth (6.2 per cent). ).
The bank expects prices in Sydney to rise by five percent and in Melbourne by 5.5 percent.
Nationally, Westpac expects house prices to rise by six per cent over the year, with the largest increases in Perth (10 per cent), Brisbane (8 per cent), Sydney (6 per cent) and Adelaide (6 per cent). cent).
The Bank of Australia and New Zealand also forecasts a 6 per cent increase in house values nationally, with a severe housing shortage setting a price floor.
When it comes to rental markets, millions of renters struggling with high prices, limited supply and intense competition are unlikely to get relief anytime soon.
Nationally, rental prices rose 8.3 per cent through 2023, said Tim Lawless, research director at data house CoreLogic.
While that was down from the 9.5 percent increase we saw in 2022, it was four times the decade average seen before Covid.
“In dollar terms, the annual rise in housing rents equates to about an additional $46 per week based on the average rental value,” Lawless said.
“Given that we have yet to see any substantive response in rental supply, rental growth is likely to remain above average in 2024.”